The next step in our analysis is to look at the possibly different effect of labor regulations on job flows of firms of different sizes. Table 14 presents regressions in which we estimate the coefficient on the interaction between the benchmark U.S. job flow and the hiring and firing regulatory indicator for firms of different sizes. Column (1) considers the hiring and firing indicator without controlling for the different degree of enforcement of laws and regulations. Interestingly, once the interaction effect is allowed to vary across firm size classes, the estimated effect is negatively signed and statistically significant at the conventional level for all size classes. Moreover, the estimated impact of stringent regulations on the variance of job flows across industries increases with firm size. As hypothesized above, smaller firms are often either exempt from certain regulations or can more easily stay below the radar screen of regulators and law enforcement authorities. The estimated negative impact of labor regulations on job flows is almost twice as strong in large firms (more than 100 employees) compared to micro units (fewer than 20 employees).
Column (2) of Table 14 presents a similar specification in which we control for the different degree of enforcement of regulations. Controlling for such effects yields larger coefficients and a larger magnitude of the impact of labor regulations on job flows. As in the previous case, the estimated effect of labor regulations increases with the size of firms.16
Appropriate care and caution is required to interpret the interaction effects estimated in Table 14 with respect to employer size. Recall that small businesses systematically have higher job reallocation rates than larger businesses in all countries including the U.S. benchmark. As such, the results in Table 13 imply that industry/size cells with a higher U.S. benchmark will have the flow reduced by labor market regulations that are enforced. For Table 14, this implies that in comparing coefficients across size class interactions, the magnitudes are comparable for a given U.S. benchmark rate. That is, the absolute effect is larger for large businesses than small businesses for a given U.S. benchmark rate. But given that small businesses have a higher U.S. benchmark rate this variation tends to work in the opposite direction.
Another step in our analysis is aimed at assessing the robustness of our results to the inclusion of regulations in the goods and services markets in our specification. As discussed above, regulations in different markets tend to be highly correlated, i.e. countries that impose strict rules of hiring and firing also tend to impose more restrictive regulations 16Also in this case, the results are robust to the use of the excess labor reallocation. See Appendix B for
Table 14: Job Flows by Firm Size - the Role of Labor and Product Market Regulations (Difference-in-Difference Analysis) (1) (2) (3) (4) Constant 0.1225∗∗∗ 0.0753∗∗∗ 0.1150∗∗∗ 0.0660∗∗∗ [0.0126] [0.0131] [0.0109] [0.0147] USA SUM 0.8379∗∗∗ 0.8579∗∗∗ 0.8401∗∗∗ 0.8371∗∗∗ [0.0700] [0.0409] [0.0988] [0.0435]
USA SUM∗EPL (Adj) -0.0546∗∗
[0.0203] USA SUM∗EPL∗<20 workers -0.0499∗∗∗
[0.0124]
USA SUM∗EPL (Adj) ∗<20 workers -0.0632∗∗∗ -0.0540∗∗∗
[0.0090] [0.0139]
USA SUM∗EPL∗20-49 Workers -0.0739∗∗∗ [0.0129]
USA SUM∗EPL (Adj) ∗20-49 Workers -0.0895∗∗∗ -0.0649∗∗∗
[0.0100] [0.0188]
USA SUM∗EPL∗50-99 Workers -0.0853∗∗∗ [0.0131]
USA SUM∗EPL (Adj) ∗50-99 Workers -0.1012∗∗∗ -0.0793∗∗∗
[0.0104] [0.0206]
USA SUM∗EPL∗100+ Workers -0.0997∗∗∗ [0.0148]
USA SUM∗EPL (Adj) ∗100+ Workers -0.1140∗∗∗ -0.0537∗
[0.0133] [0.0319]
USA SUM∗Bus. Reg. (Adj) 0.0235
[0.0255]
USA SUM∗Bus. Reg. (Adj) ∗<20 Workers -0.0096
[0.0225]
USA SUM∗Bus. Reg. (Adj) ∗20-49 Workers -0.037
[0.0309]
USA SUM∗Bus. Reg. (Adj) ∗50-99 Workers -0.0321
[0.0338]
USA SUM∗Bus. Reg. (Adj) ∗100+Workers -0.1003∗
[0.0530]
Observations 940 940 940 940
Adjusted R-squared 0.73 0.73 0.69 0.73
Standard errors in brackets. ∗significant at 10%, ∗∗significant at 5%, ∗∗∗significant at 1%. All regressions include country dummies. USA SUM: industry/size job reallocation in the United States. EU denotes the OECD European countries. Transition denotes the countries in Central and Eastern Europe. LAC denotes the countries in Latin America. EPL is the index of stringency of hiring and firing regulations. EPL (Adj) is the indicator of hiring and firing adjusted to take into account different degrees of enforcement of regulations (see main text). Bus. Reg. is the indicator of the stringency of business regulations. Bus. Reg. (Adj) is the same indicator adjusted to take into account different degrees of enforcement of regulations.
Source: Own calculations based on harmonized firm-level database.
on the goods and services markets. There are also specific aspects of product market regulations that can influence job flows over and above labor regulations. For example, since a significant fraction of overall job flows is due to the entry and exit of firms, regulations affecting the start up of a new business, as well as bankruptcy rules that affect the exit of low performing units, may affect job flows. Likewise, regulations affecting price setting by firms and their relations with the public administration and their clients can all influence incentives for firms to expand, adopt new technologies and adjust their workforce.
Columns (3) and (4) of Table 14 show the results of estimating the job flow regressions controlling for our synthetic indicator of business regulations. We correct both labor and product market regulations by the degree of enforcement proxied by the law and order indi- cator. In column (3), we do not differentiate the interactions between U.S. reallocation and regulations by firm size, while we do so in the last column of the table. Including the inter- action between product market regulations and U.S. job flows does not dramatically alter our results. Whether we differentiate the impact of regulations by firm size or not, the esti- mated effects of the interaction between U.S. job reallocation and labor regulations remain negatively signed and highly statistically significant, while the coefficients on the product market regulations are generally not statistically significant. However, once we differentiate effects by firm size, we notice that the only statistically significant effect of product market regulations is among large businesses (greater than 100 employees). Moreover, controlling for product market regulations reduces the estimated impact of labor regulations for those firms. In other words, for large firms product market regulations play an important role in curbing labor reallocation over and above labor regulations. Intermediate firms (those in between 20 and 99 employees) seem to be the most adversely affected by stringent labor regulations that raise labor adjustment costs. In terms of magnitude, note that stringent labor market regulation is associated with a 4.4 percentage points drop in job reallocation for micro firms, 3.7 percentage points drop for small firms, 4.1 percentage points drop for medium firms, and a 1.6 percentage points drop in job reallocation for large firms. Stringent product market regulation, on the other hand, has the largest impact on job reallocation by large firms: it is associated with a 1.9 percentage points drop.17
17We obtain these magnitudes by multiplying the coefficient by the standard deviation of enforcement